Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade – II - Question Paper

The interest rate charged to borrowers of euro currencies are based on London Interbank Offer Rates (LIBOR) in the particular currencies. LIBOR rates are those charged in interbank transactions and are base rates for non-bank customers. LIBOR rates are computed as the averages of the lending rates in the respective currencies of 6 leading London banks. Borrowers are charged on a ‘LIBOR-plus’ basis, with the premium based on the credit worthiness of the borrower. With borrowing maturities of over six months, a floating interest rate is charged.

Every six months, the loan is rolled over, and the interest rate is reset based on the current LIBOR rate. This decreases risk to both the borrowers and the lender, as neither will be left with a long-term contract that does not reflect the current interest costs. For example, if interest rates rise after the credit is extended, the lender will lose the opportunity to earn more interest rate for maximum six months. If interest rates fall after a loan is arranged, the borrower will lose the opportunity to borrow more cheaply for only six months. With the lower interest-rate risk, credit terms frequently reach 10 years.

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4. a. i. Spot Rate Rs./$ 45.48/45.52

Middle rate = 45.50

Forward
six month
Rs./$
45.50 ´
=
45.8354


12 month
Rs./$
45.8354 ´
=
46.1733


18 month
Rs./$
46.1733 ´
=
46.5136


24 month
Rs./$
46.5136 ´
=
46.8565


30 month
Rs./$
46.8565 ´
=
47.2019


36 month
Rs./$
47.2019 ´
=
47.5498


42 month
Rs./$
47.5498 ´
=
47.9003


48 month
Rs./$
47.9003 ´
=
48.2534


54 month
Rs./$
48.2534 ´
=
48.6091


60 month
Rs./$
48.6091 ´
=
48.9674








Month
Principal ($ Million)
Interest rate (%)
Interest payment ($ Million)
Principal repayment ($ Million)
Exchange rate (Rs./$)
Total repayment (Rs. crore)

0
44
–
–
–
45.48
(200.11)

6
44
6.50
1.430
–
45.8354
6.5545

12
44
6.30
1.386
–
46.1733
6.3996

18
44
6.45
1.419
–
46.5136
6.6003

24
44
6.50
1.430
–
46.8565
6.7005

Earning:   Approval pending.